Brazil’s economy is now officially in a recession. Its economy has shrunken by 2.44% the past two quarters. Economists define a recession as six months of shrinking GDP. Their economy is in the worst shape since the early 1990’s. As a result of poor decisions made in the past, inflation is high, and spending is low both internally and externally.
This origin of this recession really began at the end of the last recession in 2002 when it received a bailout loan. Today, Brazil is struggling to pay it off. Brazil’s credit rating is at a low which means that they will not be able to be bailed out again.
Inflation has risen to 9.29%. Economists see inflation as a good thing is low levels of 1-2%. Low inflation levels encourage spending since it creates a sense of urgency to buy before prices increase. However at such high levels of inflation, it is difficult for people to keep up with the inflation, which in turn creates consequences that far outweigh any benefit.
With inflation so high, GDP has been shrinking. Brazil’s minimum wages are based off of GDP (unlike the US which is based off of inflation), minimum wages are actually decreasing. This means that as the value of their currency is decreasing, people are actually receiving less money to spend. Unemployment is also rising making money even tighter for citizens and businesses.
In order to protect the value of their currency, their central bank (BNDES) has been continuing to increase interest rates. While that may help inflation, it discourages borrowing money, which in turn hurts spending. BNDES has considered lowering interest rates in order to stimulate spending, however that would just further hurt the inflation problem. Ultimately, money is leaving Brazil faster than it is entering Brazil, which means BNDES really can’t do too much to help the situation.
Further adding insult to injury, Brazil has been experiencing a drought which has led to severe water shortages. This is horrible news for the agriculture industry which is one of the country’s largest export. Also, most of their electricity comes from hydroelectric dams. Since the rivers which power the dams are drying up, the country has received a series of rolling brownouts and blackouts. As a result, the government has no other choice than to increase to cost of utility services, which only adds to the financial hardship.
Brazil’s largest investor Petrobras, which is a Latin America’s largest petroleum company, in in the midst of the largest corruption scandal in the Brazil’s history. As the scandal unfolds, the partially state-owned company has been brought to a standstill. Petrobras alone accounted for 1% of the country’s GDP.
Brazil’s largest exporter is China. China has also been experiencing economic woes this past year, which means they are importing less from Brazil.
The recession has been caused by a series of unfortunate events. What started as not being able to pay off debt has lead to major inflation. Meanwhile a corruption scandal has hauled a major investor. Meanwhile, bad weather has put a strain on the utility system. It looks like this recession will be here for the long haul.
Brandon Fredman
No comments:
Post a Comment